EUR/GBP: Risk to end the year in the 0.89 region - Rabobank

Jane Foley, Senior FX Strategist at Rabobank noted, "Sterling has taken a tumble this morning with cable dropping back to levels not seen since January 22. Measured against the EUR, this morning’s drop has only managed to lift EUR/GBP back to levels traded at the end of last week. The move in cable has been in part a function of this week turnaround in the USD. In recent weeks the market has unwound the long USD positions built after the US election."

Key Quotes
"With the USD having fallen back to a more neutral position it could be the turn of both the EUR and GBP to reflect heightened levels of politically motivated speculation."

"We see several factors as contributing to this morning’s drop in the value of the pound. Firstly short positions have dropped recently with PM May's speech in the middle of January shoring up confidence in the government's Brexit plan. CFTC data suggest that last week speculators’ short sterling positions were down about 35% from their post-referendum highs." 

"BoE Governor Carney disappointed some investors by steering away from a hawkish tone during his Inflation Report press conference. Carney emphasised that higher prices were due mostly to the post referendum drop in the pound and that these would eat into consumers' real incomes, slowing demand and growth."

"The recent release of official Dec retail sales data were shockingly weak at -1.9% m/m and overnight the BRC January survey highlighted a -0.6% m/m drop in like-for-like sales. A spokesperson for the BRC stated that retail sales experienced their slowest pace of growth over the festive period since 2009 with consumers being forced by highest prices to spend more on food at the expense of non-food sales." 

"While we see risk for EUR/GBP to end the year in the region of 0.89, it is clear the EUR is vulnerable to political uncertainty of its own. At the start of the year the market was unwinding some concerns about European political risks based on growing confidence that far right political parties would be unable to form governments in either the Netherlands, France or Germany this year. The scandal that has recently engulfed French Presidential Candidate Fillon, however, has unnerved investors about the likelihood of more support for the far right."

Political market moves more interesting than boring old data